At about 2 p.m. on Wednesday, Dec. 19, 2012, CNBC’s Kate Kelly broke the news that billionaire Bill Ackman’s hedge fund had taken a massive short position—about $1 billion worth, we know now—in the stock of a nutrition company called Herbalife . He considered it to be a pyramid scheme, Kelly continued, and would be presenting details the next day. Herbalife stock then fell 10% in six seconds, triggering circuit breakers and a temporary trading halt.
Ackman, now 49, is the brilliant, cocksure, media-savvy activist investor whose fund, Pershing Square, has harvested 21% average net returns since inception in 2004. The fund now commands nearly $19 billion in assets.
The day after the CNBC report, Ackman presented a “public short” the likes of which no one had ever seen before. A public short is a risky, fairly rare phenomenon in which an investor not only bets on a stock to go down—known as short-selling—but publicly announces that he has done so, explaining why. On this occasion Ackman delivered a 3½-hour, 342-slide webcast lecture at a 500-seat auditorium at the AXA Equitable Center in Midtown Manhattan in which he called the company the “best-managed pyramid scheme in the history of the world.” He expected the stock not just to decline but to go to zero, he made clear. If his bet paid off, he’d donate his personal profits to charity, because he considered any proceeds from a corporation so villainous to be “blood money.”
By the following Monday, Christmas Eve, Herbalife stock had fallen 42%, from $41.57, where it had stood before Kelly’s report, to a low of $24.24, with the company having shed close to $2 billion in market value.
Bill Ackman, left, seen in his Manhattan office in 2014, has averaged 21% net returns since 2004 in his Pershing Square fund.Photograph by Peter Yang—August
Herbalife might seem like an odd target for such venom. Based in Los Angeles, it doesn’t make cigarettes, sell alcohol, manage casinos, or emit pollutants. It’s a 35-year-old, 8,000-employee nutrition company that sells 5,300 products in 91 countries, including weight-loss powders, vitamins, performance sports drinks, and a skin-care line.
It is remarkably successful. Its main product—composing 30% of its sales—is a meal-replacement shake powder, made from soy protein isolate, called Formula 1. Though many Fortune readers have likely never heard of it, its sales are more than double those of its three leading competitors—Ensure, Kellogg’s , and SlimFast—combined. Herbalife makes 25 flavors of shakes, including piña colada in the U.S., paçoca—a peanut candy—for the Brazilian market, and borscht for China, and markets non-GMO, gluten-free, and low-glycemic versions too.
But Ackman wasn’t going after Herbalife because it sold milk shakes. His issues stemmed from its being a multilevel marketing company, or MLM. MLMs distribute their products through independent contractors who are rewarded not just for selling the company’s products but also for recruiting other distributors to do so, and for persuading those recruits to recruit still more distributors, and so on, in a pyramidal structure.
The danger with any MLM is that recruiting, not product sales, may become the raison d’être of the enterprise, which then devolves into a thinly disguised money-transfer game indistinguishable from the chain-letter scams of the 1930s—the paradigmatic pyramid schemes. Early participants make out like bandits, but later recruits are mathematically guaranteed to fail.
Some consumer advocates ardently believe that all MLMs, also known as network marketers, should be illegal. But they aren’t. Since 1979, when the Federal Trade Commission blessed the business model of the home-products marketer Amway, MLMs have been considered legitimate so long as they enforce certain safeguards designed to guarantee sustainability. Today MLMs include such everyday names as Avon (), Tupperware , Usana , Nu Skin, Primerica , and Pampered Chef—a unit of Warren Buffett’s Berkshire Hathaway.
Herbalife is the largest public MLM by market capitalization and the second largest by revenue, after Avon. With sales of $5 billion last year, Herbalife would have just missed this year’s Fortune 500, ranking at 522, were it not ineligible due to its incorporation in the Cayman Islands.
As big as Herbalife is, however, the New York–based activist is even bigger—a fact that has enabled him to launch a novel, for-profit species of holy war: one that, if successful, will enable him to slay what he believes to be a terrible dragon while netting his fund’s investors more than $1 billion in profit.
Drawing upon bottomless resources and boundless self-confidence, Ackman has committed himself to destroying the company. In the nearly three years since his AXA Equitable presentation, he has denounced Herbalife and its executives in terms that no government authority ever has. It was “one of the great frauds of all time,” he said at a public presentation; Herbalife CEO Michael Johnson was “running a criminal enterprise,” he told Fox; company executives were “at risk of going to jail,” he told CNBC.
He has hired lobbyists to alert community groups to the alleged dangers of Herbalife and has given those groups money to find victims and connect them to regulators. His agents have set up websites, taken out ads, posted notices, and set up 1-800 numbers. They have tracked down former Herbalife employees and distributors, looking for whistleblowers. They’ve solicited nonprofits, concerned citizens, and politicians—including three congressmen and a U.S. senator—to write the FTC and at least seven state attorneys general, sometimes without the letter writers even realizing that a hedge fund manager was the master puppeteer orchestrating the campaign.
Ackman urged PricewaterhouseCoopers not to sign Herbalife’s financial statements. He has made presentations to the FTC, the SEC, the Canadian competition authorities, and U.S. federal prosecutors.
The FTC and SEC have, in fact, initiated investigations of Herbalife, and Manhattan federal prosecutors have made inquiries about the company or its distributors, Herbalife has acknowledged. But federal prosecutors have also examined the practices of some of Ackman’s contractors, according to the Wall Street Journal, looking into allegations of market manipulation.
The attack raises two important questions for society. One is: Is he right about Herbalife being a pyramid scheme? That’s important because if he is, all but a handful of companies in the now $34.5 billion MLM industry, affecting 18 million distributors, are almost certainly pyramid schemes as well. As it happens, we should get an answer to this first question soon, because the FTC, responding to pressure exerted by Ackman, opened a formal inquiry into that question in March 2014—now 17 months ago.
The second and perhaps bigger question is: What if Ackman is wrong? One man’s dragon slayer is another man’s vigilante. Herbalife has had to spend almost $90 million defending against Ackman’s attack so far, according to its SEC filings, while its executives, employees, and distributors have all been villainized, if not defamed. While activist investing was already controversial, Ackman has taken it into new terrain. Is it sound public policy to have freelance, for-profit billionaire regulators roaming the landscape, no matter how well-intentioned?
Ackman rejects such criticism. “By shining a spotlight on fraud and abusive practices at Herbalife,” he says, “we have helped protect consumers, potential distributors, and investors from losing their hard-earned money. We are extremely proud of the work we have done on Herbalife.”
Perhaps the best thumbnail précis of this saga was provided by hedge fund manager John Hempton, who runs Bronte Capital, in what was actually a prognostication. Just a week after the campaign launched, he wrote in his blog, “It will be the hedge fund equivalent of Stalingrad. Someone is going to lose big. And the victor will be so bloodied that the word victory will sound hollow.”
If Ackman is the irresistible force, Herbalife CEO Michael O. Johnson is the immovable object. Johnson, who headed Walt Disney Co.’s international division before taking the reins at Herbalife in 2003, is a self-described “diesel”—a passionate nutrition nut and endurance athlete who often rides his bike 30 miles to work. In July, Johnson, now 61, completed his third Tour TransAlp, the legendarily grueling, seven-day, 550-mile stage race through the Alps during which cyclists traverse ascents totaling more than 60,000 feet. He’s not a quitter.
With dark, close-cropped hair and pointy ears, Johnson looks like a cross between Lance Armstrong and Star Trek’s Mr. Spock. An avid skier, he went to college at Western State Colorado University in Gunnison, near Crested Butte. He then bounced around through a series of ventures, selling pre-Walkman tape players to skiers, aircraft hosings and couplings, and laser light shows before being tapped in 1986 to run the international division of Disney’s home-video unit. That business took off, and he rode it up the ranks until he was heading the international operations of the whole company.
That’s where he was when—to many scratched heads, he admits—he jumped ship to become Herbalife’s CEO in 2003.
Click on the above image to see an interactive timeline for a “Scorecard for a three-year death match.” Interactive by Analee Kasudia
He’s furious about Ackman’s campaign, he says. “Wouldn’t you be?” Johnson asks in one of our four interviews. “If you’d worked your tail off for years and years and years to build something—something you believe strongly in? Along comes a guy with half-facts and half-truths and a jaded point of view and starts not just shorting your stock but trying to totally demonize me and demolish the company. It’s like, really? Who the hell does he think he is?”
Ackman, of course, thinks he’s the guy in the white hat, protecting the downtrodden from the likes of Michael Johnson.
“It’s entirely clear to us that this company is operating fraudulently,” he tells me. “They are fraudulently deceiving poor people into investing in a fictitious business opportunity. That’s illegal.”
Six-foot-three, lean, fit, with salt-and-pepper hair, Ackman cuts an intimidating presence. He rowed crew at both Harvard College and Harvard Business School and is an excellent tennis player. He spits out words with machine-gun rapidity, and often with flesh-tearing trenchancy.
We spoke at his offices on the 42nd floor of a midtown building that offers panoramic views of Central Park. Just to the east is the residential tower where he recently bought a $92.5 million penthouse duplex. It’s just an investment, he has said, because he considers it undervalued. In the corner of the conference room stands a striking memento: a rocket-powered ejection seat that once accommodated the pilot of a Canberra nuclear strike bomber of the 1950s. It evokes a crucial skill for a hedge fund manager: knowing when to bail.
Ackman’s conspicuous success speaks for itself. Yet he is fallible. His first fund, Gotham Partners, had to be suddenly wound down in late 2002 after some illiquid investments left him unable to rebound from a handful of redemptions. He also lost big on stakes in Borders, J.C. Penney , and Target . One fund, devoted exclusively to Target options, lost 90% of its value at one point. Risk management is not his strong suit.
Ackman is astoundingly competitive. In high school he famously bet his dad $2,000 that he’d score an 800 on his verbal SAT. His father wisely let him off the hook the night before, and he scored a 780. And then there was a Hamptons bike ride of 2012, described by William Cohan in Vanity Fair, in which Ackman joined several hedge fund guys and serious cyclists on a 26-mile pleasure ride. Though out of practice, Ackman rushed out in front at an unsustainable pace, became dehydrated, and had to be helped back, barely able to pedal due to excruciating cramping. One rider commented to Cohan, “His mind wrote a check his body couldn’t cash.”
In the siege of Herbalife, Ackman clearly did not anticipate the company’s staying power or the fact that a number of hedge funds would take the opposite side of his bet. The battle has taken a toll.
“If I were to assess the return on invested time, I would say it’s quite poor,” he admits. “Had we known in advance, it might have dissuaded us from making this investment.”
Yet he professes no regrets. “I’ve said publicly that if we are successful in getting this company shut down, it will be one of the most philanthropic things we’ve ever done. I will tell you, this is the most important story I’ve ever been involved with on anything ever. Okay? This is it.”
Though personalities help explain the origins of Ackman’s campaign against Herbalife, it is the law that will declare the winner. And in a word, that’s murky.
The highest tier of Herbalife’s compensation ladder, level nine, is called president’s team. Only a tiny percentage of distributors reach this level, though precisely how tiny is a matter of dispute. (In 2014 in the U.S., there were just 548 president’s team members out of 72,000 pursuing the business, and out of 554,000 total distributors.) An elite few president’s team members attain still higher titles, becoming members of either the chairman’s club (of which there are now just 48 out of 4.1 million distributors worldwide) or, most exalted of all, the founder’s circle (just eight).
Top-tier distributors are also eligible for the subjective and lucrative Mark Hughes bonus. In recent years these checks have ranged from $10,000 up to, on one occasion, $2 million.
It has always been hard to make money as an Herbalife distributor. Even by the company’s calculations only 3.7% of those pursuing the business in the U.S. grossed royalties of more than $25,000 in 2014. (That number excludes income distributors may make from retailing, but also fails to take into account any business expenses they may incur.) In addition, even by Herbalife’s numbers, more than half of all money paid to distributors goes to the top 1%. Ackman will later argue that a system so slanted toward rewarding the highest tiers—attainable only through recruiting—must be a pyramid scheme.
In May 2000, Mark Hughes, 44, was found dead in his bedroom. An autopsy blamed a toxic mix of alcohol and doxepin, an antidepressant he’d been prescribed as a sleeping pill.
He left a minor son; an underwear-model fourth wife; $100 million worth of homes in Beverly Hills, Malibu, Benedict Canyon, and Hawaii; and a company in disarray.
In 2002 two private equity firms—W.H. Whitney and Golden Gate Capital—swooped in to take the company private, paying just $347 million. They went looking for a turnaround team to spruce it up and take it public again.
A headhunter approached Michael Johnson, then in his 17th year at Disney. He was known there as the “shake guy,” since he would often replace breakfast or lunch with a blended concoction of Odwalla, protein powder, and ice.
“I basically hung up on her,” Johnson recalls. “Like many people, I had an impression of Herbalife that was not correct.”
But the private equity guys promised him he would be in control, stressed that it was about nutrition, and offered him a slice of the company. (Since taking over, Johnson has made $163.5 million from the sale of stock and options.)
In April 2003, Johnson made the move. “It was very, very rough,” he says of the transition. “There were a lot of issues I didn’t understand. A language was spoken that I didn’t get.”
Johnson tried to quickly launch a new product without consulting the distributors. “It landed with a thud,” he recalls. He hadn’t understood the distributors’ power at the company.
And they deeply mistrusted him. In the three years since Hughes’s death, four CEOs had already come and gone. The distributors’ attitude, Johnson recalls, was “Who’s this guy? What does he know? A lot of them felt that when the company went public I would exit.”
Distributors weren’t employees, so if they misbehaved, they couldn’t just be fired. The company could annul their distributorship, but that meant forfeiting a business the distributor had built over years. If expelled, the distributor might take his whole downline—sometimes thousands of people—to another MLM.
Johnson began learning about lawsuits he hadn’t known about. One involved a “lead-generation” business, called Newest Way to Wealth, which was run by six distributors. Top Herbalife distributors ran several dozen such side businesses at the time.
They worked like this. The business would run generic TV ads touting business opportunities where you could “work at home.” The contact information for those who responded was then sold to lower-level distributors in the top distributors’ downlines. They, in turn, would contact the prospective recruits and send them a video that showed testimonials of top distributors describing astounding wealth they had purportedly amassed in very little time and with no discernible skills.
If a prospect took the bait, joining Herbalife, he’d then be told that, to effectively compete, he really needed to buy a series of business tools sold by the same business—leads, a merchant account, a website, back-office software—at what might be exorbitant prices. Often the recruit was also pressured to qualify quickly for the level-five distributorship, which meant buying around $3,000 worth of products in a month.
Aside from the sleaze, the quick $3,000 purchase looked like inventory loading, characteristic of a pyramid scheme. It also typically rewarded the recruiting distributor with a quick $150 pop in his royalties (5% of $3,000), suggesting that maybe Herbalife was paying for recruiting after all—another red flag for a pyramid scheme.
Herbalife shut down Newest Way to Wealth in 2002, before CEO Johnson was hired, and reached a tentative settlement of the suit a few months after he got there.
“There were practices that were taking place that were legal, but I’m not sure they fit what we wanted to be as a company,” Johnson says.
That fall, he considered quitting. “I had some ideas in my head that maybe I wasn’t right for this job,” he admits. He went to see his mentor, Jerry Perenchio, who was then chairman of Univision. Perenchio asked him a series of rhetorical questions, Johnson recalls: “How many people get a billion-dollar platform? What’s your title over there? Who’s the captain of the ship? You can stick your tail between your legs and go back to Disney, or you can go in there and exercise your desires and will.”
“I literally went back to the office that night,” Johnson recounts, “and wrote a business plan for the company.”
The plan was about product, brand, image, and the business opportunity. At the time less than 1% of the product was being manufactured in-house. The company needed its own upgraded manufacturing facilities, he felt, plus labs to ensure that the products really contained the herbs the labels claimed they did. (After investing hundreds of millions of dollars, the company today has both, manufacturing in-house 58% of its products.)
To tout the brand, Johnson wanted to sponsor sporting events, teams, and star athletes. (It now sponsors more than 200 of them, including Cristiano Ronaldo, the Portuguese soccer star.)
Though the impetus for the changes was apparently not regulatory, its impact could be. While inventory loading seemed like a plausible charge when new recruits were being pressured to buy $3,000 worth of products in a month, it seems less so in a company that, since 2007, has actually been exhorting new recruits to slow down their purchasing.
In 2006 an Herbalife distributor introduced nutrition clubs into the U.S., a concept that arose in Mexico. The way they worked was that a distributor invited customers into a commercially leased space for a small admission fee, usually $5. The charge entitled the customer to consume on premises servings of three prepared Herbalife products: a shake, an aloe drink, and a tea. The club owner would monitor the customer’s progress toward his weight-loss goals, and the customers encouraged one another, as they might at a Weight Watchers meeting.
Herbalife CEO Johnson first heard about nutrition clubs three years earlier, he says, when certain distributors were complaining about them. The critics thought they amounted to retail outlets, which are forbidden under Herbalife’s rules. (Retail outlets undermine any MLM’s structure by allowing the distributor who opens one to steal other distributors’ customers.)
Johnson and Walsh went to look at a club in Zacatecas, Mexico. “I remember Des and I looking at each other,” Johnson says, “and thinking, What’s wrong with this? Daily customers? Daily consumption? A community model? They were celebrating people’s birthdays and weight loss, and the feeling was just incredible. I said, ‘Boy, if this isn’t a potential future for our company I don’t know what is.’ ”
Nutrition clubs effectively allowed Herbalife to reach lower-income customers—because they required only a $5-per-day payment rather than, say, a $39.90 purchase of a 30-serving canister of Formula 1. Today there are about 6,000 nutrition clubs in the U.S., and more than 35,000 in Mexico.
Herbalife nutrition club owner Edgar Montalban, shown in June 2013, prepares a meal-replacement shake in Queens, N.Y.Photo: Scout Tufankjian—The New York Times/Redux
They became particularly popular in Spanish-speaking communities of the U.S. As of 2009 about 64% of Herbalife’s U.S. distributors were Latino. (Today, according to the company, the percentage has dropped to only 36%—a figure Ackman scoffs at, asserting that it’s much higher.)
As successful as the model was, not everyone was thrilled with it. Because the clubs let Herbalife sell its products and business opportunity to lower socioeconomic strata than had been previously possible—more vulnerable populations—a former financial journalist named Christine Richard found them to be diabolical.
By the summer of 2011, indeed, Richard had concluded that a great deal was wrong with Herbalife. Above all, she thought, it was a pyramid scheme. Richard worked for the Indago Group, a research boutique that sold much of its work to short-sellers. Richard’s boss at Indago was Diane Schulman, a TV producer turned licensed investigator, and hedge fund types jokingly referred to the two as the Indago girls.
When Richard first spoke to investors about shorting Herbalife, many were wary, she recounts in an interview. “But Christine,” she remembers skeptics telling her, “what’s the catalyst? Why are regulators going to do something now if they haven’t done something in 30 years?” A catalyst is an outside force—a regulator, a journalist, a downturn in the business cycle—that exposes a dirty little secret at a company’s core, causing its stock to plummet.
That wasn’t the response of Bill Ackman, who was also an Indago client. Though Ackman usually takes long positions, he has occasionally placed short bets, and Richard had written a book called Confidence Game about Ackman’s most remarkable one. In 2002, Ackman took a massive public short position predicated on the audacious theory that the then triple-A-rated bond insurer MBIA—whose guarantees were propping up the ratings of countless other financial obligations that Wall Street was flogging across the globe—was catastrophically overleveraged and destined to collapse. He doggedly maintained that thesis for five years, weathering ridicule, onerous carrying costs, and even an MBIA-spurred New York State attorney general’s probe for stock manipulation (he was exonerated), before tasting sweet vindication in 2007. When the financial crisis hit, MBIA failed, and Ackman’s fund made more than a billion dollars.
When Richard took her Herbalife suspicions to him, Ackman recalls, she said, “Bill, I think I found the next MBIA.”
In late October and, again, in late November, says Herbalife’s DeSimone, he was alerted to unusual “put” activity—a type of options contract that short-sellers buy—on Herbalife stock. Most of these put buyers were effectively betting that the stock would drop markedly sometime before Dec. 21, 2012, the date when those options would expire.
When CNBC’s Kate Kelly announced Ackman’s short position on the afternoon of Dec. 19, and that he’d be presenting his thesis the next day, the reason for the put activity seemed evident to Herbalife CEO Johnson. Fifty-five minutes after Kelly’s report, he called into CNBC by phone, his fury evident.
“This isn’t about Herbalife’s business model,” he said. “This is about Bill Ackman’s business model … This is totally wrong what’s taking place … This is blatant market manipulation.” (Ackman says he’d purchased no put options at all in Herbalife at that stage. He had simply borrowed common stock and sold it—the conventional short position.)
Ackman’s Dec. 20 presentation was deeply disturbing. There was a lot about Herbalife that was suspicious. Its flagship product, Formula 1, though virtually unknown to Ackman’s audience, had recorded sales of $1.8 billion the previous year, surpassing those of Palmolive and Clorox, and falling just shy of Gerber’s.
It’s “the only $2 billion brand nobody’s heard of,” Ackman acidly observed.
How could that be? His answer, of course, was that Herbalife’s product sales were just empty manipulations of the company’s compensation scheme, which revolved around recruiting. At one point Ackman’s principal analyst at the time, Shane Dinneen, asked, “Do we even know if any retail customers exist?”
Furthermore, the company’s international growth—into 88 countries as of that point—evinced the desperate, exponential expansion of a pyramid scheme poised to collapse, he argued. What the company really sold in all these countries, Ackman explained, was not Formula 1 but a fictitious business opportunity.
Then he played a creepy, officially produced Herbalife video. Doran Andry, a chairman’s club-level Herbalife distributor, was leading a tour of his opulent Beverly Hills home. When he first joined Herbalife, Andry said in the video, he was working just “two or three hours a week,” and yet after his “very first calendar year,” his “income hit $350,000. In my second year, I turned 30 … and our income hit $1.1 million.”
“You know, it’s really amazing,” he continued. “I step out of the Ferrari, the Bentley, or whatever, and people go, ‘What does that guy do for a living?’ And I go, ‘I’m an Herbalife independent distributor,’ and people are absolutely amazed.”
“I am utterly convinced by everything in Bill Ackman’s presentation,” wrote Bronte Capital’s John Hempton in a blog post. “Except the conclusion.”
By Ackman’s calculations the chance of reaching president’s team was less than 0.04%. And even those who did had a median annual gross compensation of only $337,000—nothing that could support Doran Andry’s lifestyle.
The reality, Ackman observed, was that in the previous year (2011), according to the company’s own disclosures, Herbalife paid 88% of its distributors nothing at all.
As troubling as the presentation was, some Wall Street observers were skeptical.
The Doran Andry video had been made in 2003—nine years before Ackman’s presentation. Subsequently, however, CEO Johnson had started toning down such claims, voluntarily disclosing the average gross compensation the company paid its distributors and requiring that income testimonials include disclaimers (at least in the U.S.) referring to that statement. (Ackman argues that Herbalife’s average gross compensation disclosures are misleading. The FTC, for its part, does not require such disclosures, nor explain how comprehensive they must be, if provided. A rule to mandate standardized MLM disclosures was proposed in 2006, but the FTC dropped it in the face of opposition from the MLM industry.)
Beyond the fact that one of the nation’s shrewdest investors had now shown confidence in Herbalife, Icahn’s involvement posed a technical peril for Ackman: the short squeeze.
A short squeeze is a feedback loop that occurs when excess demand for a stock pushes the price up, pressuring short-sellers to cover their positions, which requires them to buy stock, which further pushes the price up, and so on.
As Icahn continued buying—today he owns 18.4% of the company and has negotiated effective control over five of its 13 board seats as well—the danger of a short squeeze was becoming acute.
At the time the other biggest buyer was the company itself, which had long been pursuing stock buybacks as a corporate policy. In January and February it bought back stock worth $160 million and began looking for financing to buy more than $1 billion worth more.
Then fate granted Ackman a weird reprieve. It came in April 2013, when the FBI photographed senior KPMG partner Scott London accepting an envelope full of cash from a golf buddy at a Starbucks in the San Fernando Valley. London was quickly arrested for insider trading: For years he’d been tipping off his friend about clients’ upcoming financial statements. (London pleaded guilty and, in April 2014, was sentenced to 14 months.)
As it happened, London was the signing partner on two corporations’ audits—Skechers and, yes, Herbalife. Though KPMG had no reason to believe anything was amiss with the statements, it said, London’s conduct meant it had to withdraw approval for several years of financials for both companies.
Without audited financials, Herbalife effectively couldn’t borrow, and it had to shelve plans for more buybacks.
Herbalife hired PricewaterhouseCoopers and said it aimed to have the statements reapproved by the end of the year.
Ackman set out to block that from happening. In late August he wrote the accounting firm a 52-page letter, raising 10 categories of allegedly faulty accounting by Herbalife, as well as several potential conflicts of interests on Pricewaterhouse’s part. In one of nine follow-up communications to the accountants, Ackman noted: “Let’s not forget that Arthur Anderson was destroyed rightly or wrongly by its perceived implicit approval of Enron’s business. As such, I believe that history will judge PwC’s approach to this important matter.”
In December the accounting firm reapproved the financials anyway.
“I was surprised,” Ackman says. “Pricewaterhouse put themselves in a position where they will be one of the deep pockets when this thing goes down.”
Meanwhile Ackman was trying to blunt the impact of Herbalife’s rebuttal presentation of January 2013. He argued that Herbalife’s surveys, purporting to verify consumer demand, were too small to be authoritative. Since Herbalife’s rules require distributors to keep paper records of their retail sales in case of audit, Ackman demanded that Herbalife call in all those records from its 550,000 distributors and make them public. He even offered to have Pershing Square foot the costs.
After his original presentation, Ackman put on three more. But the sequels were largely duds, or worse, in the market’s eyes.
In the second, in November 2013, four victims were interviewed. But they all described being victimized by a lead-generation business. It was one of just two that still existed in 2012, accounting for less than 1% of the company’s revenue, according to Walsh. In fact, the victims all said they’d been burned by an outfit that, as it happens, had been banned by Herbalife two weeks before Ackman’s attack. (The outfit was run, however, by a distributor who had also headed Newest Way to Wealth a decade earlier. At a minimum, it could be argued, the company should have been watching him like a hawk.) Herbalife finally banned all lead selling or buying in June 2013.
The third presentation, in April 2014, alleged that Herbalife’s methods of doing business in China violated Chinese law, which forbids MLMs. A tough slog, the presentation struck some as peripheral to the pyramid-scheme allegation. They saw it as “thesis creep,” which, as one major investor commented to me, “is one of the worst things you can have in this business.”
At the last event, in July 2014, Christine Richard made a presentation on nutrition clubs. By this time she’d left Indago to form her own boutique, whose sole client was Ackman. After visiting more than 240 nutrition clubs in several countries, she said, she had concluded that naive, often undocumented immigrants were being defrauded into something resembling indentured servitude by predatory, distributor-led, company-countenanced training programs. Trainees were allegedly being induced to generate artificial business for an existing nutrition club—dragging friends and family to show up, while shelling out money to pay for their shakes.
“I’ve really sort of had it with this Ackman guy,” Carl Icahn told CNBC.
About two hours into the presentation, Ackman became choked up as he spoke of his own family’s humble immigrant past. Wiping away tears, he said: “I’m a huge beneficiary of this country, okay? Michael Johnson is a predator, okay? This is a criminal enterprise, okay? I hope you’re listening, Michael. And it’s time to shut the company down.”
Richard’s research was disquieting. But Ackman had fatally overhyped it, promising it would deliver the “death blow.” As soon as it became clear that there was no smoking gun, the stock began to rise. It ended the day up 25%, at $66.77—the stock’s largest single-day jump ever.
Richard’s presentation was “nonsensical,” Des Walsh asserts. “The beauty of clubs is you could go in and sit in a corner and see for yourself. When you see police officers and firemen and the neighborhood barber, and mothers from the neighborhood come in with their babies … she would know it’s not true.”
.